The Three Section 4980H Affordability Safe Harbors

The Affordable Care Act’s (ACA) employer shared responsibility provisions require certain employers to offer health insurance to their full-time employees or face potential penalties. These penalties are often triggered if the health coverage offered is not considered “affordable” under the law’s specific definition. The standard for determining affordability is complex for employers, as it relies on information they do not typically possess. To address this administrative challenge, the Internal Revenue Service (IRS) provides alternative methods, known as safe harbors. These safe harbors give employers a practical way to measure affordability using information that is readily available to them, which simplifies compliance and minimizes the risk of financial penalties.

Applicability and the Affordability Standard

The requirements of Internal Revenue Code Section 4980H apply specifically to businesses classified as Applicable Large Employers (ALEs). An employer achieves ALE status for a calendar year if it employed an average of at least 50 full-time employees, including full-time equivalent employees, during the preceding calendar year.

Once an employer is identified as an ALE, it must offer health coverage that is affordable. The statutory definition of affordability is based on an employee’s total household income. For plan years beginning in 2025, coverage is considered affordable if the employee’s required contribution for the lowest-cost, self-only plan does not exceed 9.02% of their household income. This percentage is adjusted annually by the IRS for inflation.

The difficulty with this standard is that employers rarely have access to an employee’s complete household income information, as it may include income from a spouse or other sources. This information gap makes it nearly impossible for an employer to perform the default affordability calculation. This impracticality is the reason the IRS established the three affordability safe harbors.

The Three Affordability Safe Harbors

The IRS allows ALEs to use one of three safe harbors to test for affordability. These methods substitute an employee’s household income with more accessible data from the employer’s records. An employer may use one or more safe harbors for different employee categories, provided the use is uniform and consistent.

The Form W-2 Safe Harbor

The Form W-2 safe harbor is a reliable method for determining affordability. Under this approach, coverage is affordable if the employee’s contribution for the lowest-cost, self-only plan does not exceed the annually adjusted percentage of the wages in Box 1 of that employee’s Form W-2. For 2025, this percentage is 9.02%. For example, if an employee’s Box 1 wages for 2025 are $40,000, the maximum annual premium is $3,608 ($40,000 x 9.02%), which translates to a monthly premium of no more than $300.67. A consideration for this safe harbor is that the calculation is performed retrospectively once the Form W-2 is finalized, which can create a challenge for setting premiums as final wages may be affected by unpaid leave or changes in compensation.

The Rate of Pay Safe Harbor

The Rate of Pay safe harbor allows an employer to assess affordability based on an employee’s compensation rate at the beginning of the plan year. For an hourly employee, the employer multiplies their lowest rate of pay during the month by 130 hours to establish a monthly wage equivalent. For instance, if an hourly employee’s lowest pay rate is $20 per hour, their deemed monthly income would be $2,600 ($20 x 130 hours), and the maximum monthly premium would be $234.52 using the 9.02% affordability threshold. For a salaried employee, the employer uses their monthly salary; if a salaried employee earns $5,000 per month, their maximum premium contribution would be $451. This method cannot be used if an hourly employee’s rate of pay is reduced during the year.

The Federal Poverty Line Safe Harbor

The Federal Poverty Line (FPL) safe harbor is the simplest to administer. Coverage is affordable if the employee’s monthly contribution for the lowest-cost, self-only plan does not exceed the affordability percentage of the mainland U.S. FPL for a single individual, divided by 12. For 2024, the FPL for a single individual is $15,060 annually. Using the 2024 FPL and the 2025 affordability percentage of 9.02%, the maximum annual premium would be $1,358.41, resulting in a monthly premium of $113.20. Employers can use the FPL guidelines in effect within six months before the plan year starts, which provides stability when setting premiums, but this method results in the lowest maximum employee contribution and may require a larger employer subsidy.

Reporting Safe Harbor Use on Form 1095-C

Applicable Large Employers must file Form 1095-C for each full-time employee to demonstrate compliance. This form details the health coverage offered each month. The IRS uses it to administer the employer provisions and determine an employee’s eligibility for premium tax credits on the Health Insurance Marketplace.

The use of an affordability safe harbor is reported on Line 16 of Form 1095-C. This line requires a code from Code Series 2 to explain why an employer should not be subject to a penalty. If an employee was offered affordable coverage under a safe harbor but declined it, the employer must enter the corresponding code on Line 16.

Each affordability safe harbor has a unique code. Code 2F is for the Form W-2 safe harbor. Code 2G is for the Federal Poverty Line safe harbor. Code 2H signifies the Rate of Pay safe harbor was used. An employer enters the appropriate code for each of the 12 calendar months the safe harbor was used. Failure to accurately report this on Form 1095-C could lead the IRS to incorrectly conclude an affordable offer was not made, potentially triggering a penalty.